Liquidity crunch

The banking sector in Nepal has been suffering a liquidity crunch for months.  As a result, the commercial banks have tightened loans. Lending in real estate, share market and automobiles has been halted as these sectors are considered unproductive sectors.

As per the prevailing directives of the NRB, the commercial banks are required to invest 20 per cent of their total loan portfolio in the productive sector. During the first six months of this fiscal year, lending to the unproductive sector was twice as high as lending to the productive sector. Multiple  reasons are there for this state of liquidity crunch in Nepal. The commercial banks alone are not to blame for the worsening liquidity situation. The government’s inability to spend money for development works is also the reason. As of January 12, the government has spent merely Rs 34.7 billion out of total capital budget of Rs 311.94 billion. This is hardly 11.13 per cent of the total capital expenditure while around Rs 280 billion remains unspent in the government treasury. The post-quake reconstruction works are also not progressing well due to which a huge amount of money has been lying idle.

Similarly, the flow of remittance has decreased these days. Therefore, it is natural that the economy will suffer once the inflow of remittance decreases. Imbalance between imports and exports can also be taken as a cause for the worsening situation of liquidity. Whenever the rate of import exceeds export, the liquidity of a country worsens.

Banks have collected deposits of Rs.154 billion since the beginning of this fiscal year in mid-July till January 13, as per the latest data of Nepal Bankers’ Association (NBA). In contrast, credit flow has stood at Rs.204 billion. Such mismatch in deposit collection and credit disbursement is sure to create liquidity shortage. NRB has set the CD ratio at 80:20, which means a bank cannot lend more than 80 per cent out its deposits. It means if a bank collects 100 rupees then it can lend only 80 rupees.  As NRB is against increasing the CCD ratio the commercial banks have tried to rationalise the CCD ratio by mobilising deposits. They have hiked the rate of interest on fixed deposits up to 12 percent. Offering higher interest on fixed deposits to collect money is not bad but just a short-term option to solve the problem. It seems that there is not enough research from the government as well as from private sectors on such issues.